Company Background
Sun Gas Co. (Sun) is a private company that operates gas stations and convenience store kiosks throughout Ontario. Mr. Pat Sun is the sole shareholder.
Sun’s growth mainly through purchasing vacant land or old buildings and constructing the stations. Fiscal year is December 31, 2014.
Sun expects further expansion and has negotiations on purchasing an existing chain from AB Petroleum Limited (ABL).
Other
Sun’s financial statements will have impacts with purchasing the shares of ABL, and audited financial statements are required to be submitted by Sun’s bank agreement.
ABL’s financial statements are for tax purpose only and never issued to anyone else.
Constraint
Sun Gas Co. is a private company and using ASPE as their basis of accounting.
Users and User Needs
Sole shareholder (Mr. Pat Sun)
Mr. Sun will use financial information to decide how far this company can expand. He would like to have aggressive financial statements because he needs to maximize sole shareholder value and more aggressive financial statements he has, the wider the company can expand and the more he can maximize his value.
Sun’s management
Management would like to have aggressive financial statements because the management expects the expansion in southwestern Ontario.
Sun’s controller (A.C. Slater)
Controller would like to have aggressive financial statements because the only information they have on ABL is at December 31, 2013 and a lot changes need finance may intervene before the close date December 31, 2014.
Potential Bank
The bank will use Sun’s financial statements as their source of information regarding bank agreements on any potential lending decision. The bank would like to have fair audited financial statements because they allow bank to have a fair point view of the company and decide the contents of the bank agreement.
Accountant/Advisor
The advisor will use financial statements to advise the company on the accounting for the purchase of the shares of ABL.
To: Sun Gas Co. Management
From: CPA, CA/CGA/CMA, KPNG LLP accountant
Re: Advice on the accounting for the purchase of the shares of ABL
Sun Gas Co.
Analysis and recommendations
Issue: Liabilities
Analysis:
ABL’s balance sheet is not balanced. Total assets are $9,400,000*, while total liability and equity are $5,500,000*. They are not equal. This could be a mistake made by ABL’s accountant. The accountant probably recorded other kinds of liabilities as total liabilities. Otherwise, this could be a financial problem in ABL.
Recommendation:
Sun can require ABL give reasonable explanations about this problem.
Conclusion:
In the case that it is the mistake made by the accountant, Sun’s balance sheet would not be affected nor net income. However, it is a problem, this would impact Sun’s ratio and further affect shareholder’s benefit and bank agreement depends on increasing liabilities or decreasing assets.
Issue: Sub-leases
Analysis:
Lease income relates to income from the sub-leases on the two locations where ABL sub-lets excess building to other businesses. Sun is looking to cancel these sub-leases with the sub-lessees.
Under ASPE, a capital lease must meet both criteria, which are the credit risk associated with the lease is similar to other comparable receivable and the un-reimbursable costs incurred by the lessor can be reasonably estimated. However, the information given about sub-leases is inadequate; it cannot conclude it is a capital lease.
Recommendation:
Sun can require ABL give complete information about sub-leases.
Conclusion:
Sun has been decided to cancel those sub-leases which lease income will be zero, total revenue will decrease and net income will decrease. However, if Sun learned complete information about these sub-leases from ABL and decide not to cancel, net income will not be affected.
Issue: Salaries
Analysis:
Salaries include wages for store clerks and gas attendants, and wages and benefits for two office workers who assist in the
